Springtime in Russian retail Major trends and consumer insights
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The Russian economy is recovering, with major macroeconomic indicators showing modest growth The Russian economy is expected to reach pre-crisis level in 2018 Russia s real GDP in 2017 showed its highest growth since before the economic crisis began, increasing by 1.5%. Forecasts predict that the Russian economy will see the same growth rate of 1.8% in 2018 as it did in 2013. GDP growth is expected to stay between 1.7-1.8% for the midterm. Russian real GDP, RUB trillion (constant prices from 2011) -2.5% +1.8% 63.6 64.1 62.4 62.3 63.3 64.4 65.6 66.7 2013 2014 2015 2016 2017 2018F 2019F 2020F Russian real GDP growth, % YOY change 1.8 0.7-2.5-0.2 1.5 1.8 1.8 1.7 2013 2014 2015 2016 2017 2018F 2019F 2020F Due to a slowdown in inflation, real wages have started to grow For the mid-term, inflation is expected to stay at 4%. Considering the low CPI level forecasted, the growth in real wages is expected to be limited to a level of 2.8-3.7% in 2018 2020. Consumer price index, % YOY change 6.5 12.9 11.4 5.4 2.5 4 4 2013 2014 2015 2016 2017 2018F 2019F 2020F 4 Real wages growth, % YOY change 4.8 1.2-9 0.8 3.4 3.7 2.9 2.8 2013 2014 2015 2016 2017 2018F 2019F 2020F The growth in real wages has led to an increase in retail turnover Retail turnover growth rate moved in a positive direction in 2017, but it still did not reach pre-recession levels. While the average basket followed an upward trend, it is still below its peak in 2015. Retail turnover, % YOY change 3.9 2.7-10 -4.6 1.3 3 2.6 2.6 2013 2014 2015 2016 2017 2018F 2019F 2020F Average basket, RUB 519.6 2013 552.7 2014 575.3 2015 523 2016 529.3 2017 Sources: Data from international agencies; the Federal State Statistics Service; Romir; PwC analysis. 3
Consumers remain conscious of prices and conservative about the future of the Russian economy Consumers do not expect the economy to improve Despite GDP growth and historically low inflation in Russia in 2017, consumers continue to be conservative about the future of the Russian economy. In 2016 2017, the number of respondents who did not expect the economy to either grow or decline in the short term did not change. On a positive note, a growing number of people believe the economy will remain stable. Consumer expectations for the economy over the next 12 months, % of respondents Not sure 5% Better than this year Worse than this year 17% 17% 16% 24% 23% 27% 27% 37% Income 25% <70k Income 24% <70k Income >70k 35% 19% Income >70k People consider inflation to be the main risk to their spending The Russian population has endured high inflation over the past decades and has survived three major economic crises over the past 20 years. That distress has generated public mistrust in the government s monetary policies and, consequently, concern over surging prices and inflation. Even though inflation was at 2.5% in 2017, it continues to remain a major risk that could negatively affect consumer incomes. Sixty-three percent of respondents indicated inflation as the top threat to their financial security. Same as this year Top three external factors that will impact the most spending over the next 12 months, % of respondents 63% Inflation Fuel and petrol prices Economic recession Sources: PwC survey; PwC analysis. 30% 33% 2015 2016 2017 Q: Not taking into account your personal circumstances, what is your impression of how the overall economy will perform in 2018? 52% 45% 11% 3
The crisis of 2014 2016 led to a reduction in overall expenses, including for food and fastmoving products, and frugality has become the primary spending model Buying more during promotions became the most popular tactic for saving money during the crisis from 2014-2016, and crisis habits started to appeared during that time From 2015-2016, consumers faced a sharp decrease in income, which resulted in a reduction in essential costs. Over the years, the crisis model for the consumption of goods and services became the new normal. Consumers continue to be cost-sensitive, e.g. less impulse purchases, buying more private labels products, less purchases on credit, less savings and less eating out in restaurants and cafes. Share of consumers who have resorted more to specific savings tactic, % of respondents Buy less 27 31 Buy more during promos +4% 14 +10% 24 % Buy cheaper brands 20 +1% 21 Buy from cheaper retailers 20 +2% 14 2015 2016 Although some consumers are planning to increase spending, a large segment is likely to remain frugal People s perception of the economy generally correlates with their expectations about their future personal spending. Since people believe that the economic situation remains unchanged from one year to the next, most respondents plan to keep their spending at current level. Nonetheless, a positive sign is that more consumers plan to increase their spending over the next 12 months. Respondents with monthly income greater than RUB 70,000 are more optimistic about the short term and expect things to get better over the next 12 months when compared to respondents with monthly incomes less than RUB 70,000. For R&C companies, the middle class is the main driver of increasing sales because they are the first ones to increase their spending compared to other segments of the population. Consumers shopping plans over the next 12 months, % of respondents Around the same Income Slightly more Much more Slightly less Much less 3% 3% 6% 11% 8% 17% 6% 9% 20% 23% 15% 18% 49% Income 21% Income <70k 28% >70k 57% 56% Higher income groups feel more confident, while lower income groups are more affected 2015 2016 2017 Sources: PwC Crisis Survey, 2015 2016; PwC survey; PwC analysis. 5
Despite recent signs of recovery, the sales dynamic for food retailers LFL is negative in comparison to the rate of inflation Buying during promotions and in cheaper formats is still part of consumers behaviour, putting pressure on retailers margins. Because of this, hypermarkets are losing a greater share compared to convenience stores Retailers are continuing their marketing and promotional activities to compete for customers. Operational efficiency and cost optimisation strategies will remain most important tactics for increasing margins. Average LFL sales growth by format when adjusted for food inflation, 2013-2017 Supermarkets and convenience stores -2.2% Hypermarkets -6.1% Supermarkets and convenience stores have shown mixed LFL sales growth, with the recent average growth in LFL sales close to the rate of inflation LFL sales growth adjusted for food inflation, % 10 5 0-5 -10-15 2013 2014 2015 2016 2017 Perekrestok Pyaterochka Average LFL sales growth Magnit convenience stores DIXY LFL average basket growth in 2017, % 3.2% Perekrestok LFL traffic growth in 2017, % 6.7% 1.7% Pyaterochka 2.8% 1.2% Magnit convenience stores -2% DIXY Perekrestok Pyaterochka -2.6% Magnit convenience stores -10.5% DIXY Since the 2014 recession, most hypermarkets have demonstrated growth rates below the rate of inflation, with limited signs of recovery to date LFL sales growth adjusted for food inflation, % LFL average basket growth in 2017, % 5 Karusel 5.3% 2.2% 1.9% 0-5 -10-15 -20 2013 2014 2015 2016 Lenta hypermarkets Average LfL sales growth O Key hypermarkets and supermarket Magnit hypermarkets 2017 Karusel LFL traffic growth in 2017, % 0.1% Lenta hypermarkets Karusel -1.4% Lenta hypermarkets O Key hypermarkets and supermarkets -5% O Key hypermarkets and supermarkets -2.5% Magnit hypermarkets -7.9% Magnit hypermarkets Note: The average LFL sales growth is based on the growth rates of LFL sales weighted by retailers current sales. Sources: Companies data; PwC analysis. 5
The food retail market further consolidated during the recession, with X5 Retail Group and Magnit significantly increasing their market shares Market shares of retailers in terms of grocery retail turnover in Russia, % 2013-2017, pp 85.9 84.1 81.8 78.9 77.3 Other 8.6 1.2 O Key +0 1.3 2 DIXY Group +0.4 1.2 2.3 2.5 Lenta +1.2 1.2 2 2.2 1.2 1.8 1.9 8 Magnit +2.8 1.6 1.3 1.6 7.8 7.1 5.2 6.2 4.8 5.1 6 7.5 9 X5 Retail Group +4.2 2013 2014 2015 2016 2017 Sources: PwC survey; PwC analysis. 7
Retailers are focusing on increasing their capabilities by cooperating, developing new areas of activity and e- commerce channels, adopting technologies and expanding across Russia Activities and projects in the food retail sector Buying or selling X5 Retail Group, Lenta and Azbuka Vkusa has acquired Sedmoy Kontinent s rental rights to retail premises. Lenta has reached an agreement with the Holiday Group to purchase 22 supermarkets in Siberia. X5 Retail Group is selling Perekrestok Express and acquiring the O Key supermarket chain. E-commerce Auchan has started selling products online in Russia. Innovative technologies New opportunities for business development Strategic partnerships Perekrestok has launched a new system that identifies customers on their stores Wi-Fi networks and provides them with personalised offers. The Pyaterochka supermarket chain has begun using a bot to recruit prospective employees. Auchan has opened an innovative flagship store in the centre of Moscow with electronic price labels and digital information panels. X5 Retail Group is developing self-service technology and testing a mobile app that scans and pays for goods automatically. O Key plans to optimize the retail space of hypermarkets (decrease store size from 1,100 12,000 sq m to 3,000 7,500 sq m) and to reduce a number of retail formats (from 51 to 6). Magnit has started to test wholesale stores. Dixy and Megapolis have launched the wholesale distribution of fast-moving consumer goods to small retailers. Lenta has launched wholesale trade for small businesses. O Key is providing space in their hypermarkets for the fashion retailer Familia. Their partnership includes marketing campaigns and sales promotions. X5 Retail Group and Danone are planning to sell unique dairy products in X5 Retail Group stores. Sources: Open sources; PwC analysis. 8
Activities and projects in the non-food retail sector Buying or selling Expansions New entries and closings E-commerce Innovative technologies The Safmar Group has announced the consolidation of its household appliances and electronic goods retail assets, M.Video and Eldorado, under the name M.Video (Safmar had previously merged Technosila and Eldorado). Safmar is continuing to increase its market share in the retail of electronics and household appliances. The group is negotiating the acquisition of Media Markt, the Russian subsidiary of the German holding company Media-Saturn-Holding GmbH. Uniqlo is expanding to the Russian regions. AliExpress is planning to open showrooms at the points of sale of mobile operators in Russian cities. The BNS Group is opening its first women s luxury boutique, Karl Lagerfeld, in spring 2018. Disney has opened a toy store in Russia. Reviva Holdings closed its last Debenhams store in summer 2017 and is now planning to develop the Stockmann retail chain. Accessorize, Mexx and the British baby and toddler-focused retailer Mamas & Papas have all left the Russian market. Yandex and Sberbank have set up an e-commerce partnership to develop an online retail aggregator. Alibaba has launched Tmall, a new online platform, in the Russian market. Adidas is focusing on increasing its online sales. Hoff is planning to implement VR technology in its stores. M.Video, Alfa Bank and Sberbank have launched a blockchain platform for factoring operations. Lamoda launched a way to search for clothing and accessories by allowing customers to upload a picture of their things to their mobile app. Sources: Open sources; PwC analysis. 9
Consumer goods companies are focused on localisation and developing online sales channels Activities and projects in the consumer goods sector E-commerce Localisation and expansion Danone has launched an online store for dairy products that delivers in Moscow. Danone plans to expand to the Russian regions within the next few years. The KDV Group, a Russian confectionary producer, has launched an online store. Miratorg has opened its own online store. Unilever considers opening of its own tea and ice-cream stores in Russia. Mars has opened its tenth pet food plant. Swedish bread producer Lantmannen is planning to acquire a second factory in Russia. The KDV Group has bought a 60-hectare plot of land in the Orel Region to satisfy demand for its flour. The Chinese consumer electronics manufacturer BBK Electronics is going to start selling Vivo smartphones in Russia in 2018, with a marketing campaign to take place during the 2018 FIFA World Cup. Chinese tea producer Hunan Super Industrial is planning to spend USD 150m to build a tea factory in Moscow Region. Sources: Open sources; PwC analysis. 9
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Contacts Martijn Peeters Partner, Retail & Consumer Leader martijn.peeters@pwc.com +7 (495) 967 6144 PwC Russia (www.pwc.ru) provides industry-focused assurance, tax, legal and business consulting services. Over 2,500 professionals working in PwC offices in Moscow, St Petersburg, Ekaterinburg, Kazan, Novosibirsk, Rostov-on-Don, Krasnodar, Voronezh, Vladikavkaz and Ufa share their thinking, experience and solutions to develop fresh perspectives and practical advice for our clients. The global network of PwC firms brings together more than 236,000 people in 158 countries. * PwC refers to OOO PricewaterhouseCoopers Advisory, or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate legal entity. 2018 OOO PricewaterhouseCoopers Advisory. All rights reserved.